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Sustainability

Sustainability strategy is a key focus area for investors

To help companies better prepare for investor meetings, we collate feedback and key questions asked by investors each quarter during NatWest Markets-led deal and non-deal related roadshows. For Q3, our insights have been gathered via corporate issuance from sectors such as consumer, real estate investment trusts (REITs), utilities, and electric distribution.

I. Key themes

  • In Q3 2022, the top categories of focus for investors were: sustainability strategy (27%), sustainability Key Performance Indicators (KPIs) (19%), and sustainability projects (12%), which differed from Q2’s top three categories: sustainability KPIs, bond characteristics, and reporting. This was because the sample issuers from this quarter were from diverse sectors with an increase in the number of both inaugural and repeat issuers 
  • Share of questions under sustainability strategy increased by 15% compared to Q2 2022, with varied questions relating to cost implications for customers when considering sustainability goals, responsible procurement operational expenditure (OpEx), customer reception towards an organisation’s sustainability targets or products, and factoring in a competitor’s sustainability actions when setting targets
  • Share of questions under reporting fell by 10% compared to Q2 2022, however the types of questions were dependent on frequency of issuance. For example, for inaugural issuance, investors were keen to understand if reporting would be undertaken on an individual asset level, the choice of external party for post-issuance verification, and reporting of certifications for impact metrics. For repeat deals in REITs, investors demanded a figure on “avoided/reduced emissions” rather than simply being provided with the number of buildings as an impact metric
  • Share of questions under Sustainability KPIs remained the same ~19%, although in this quarter questions were broad ranged; assessing aggressiveness of KPIs, risks and challenges associated with achieving targets, and linking of management salaries to sustainability goals.

Split of questions by different topics

Notes: Based on 193 questions and feedback received in Q3 2022. Sectors include consumer, REITs, utilities, and electric distribution. “Others” includes sustainable finance framework, verification, ESG assessment, stakeholder relations, and second party opinion (SPO) categories.

Source: NatWest, ESG-related investor questions and feedback for corporates in Q3 2022.

 

Percentage of questions under each topic: Q2 2022 and Q3 2022

Notes: Based on 193 questions and feedback received in Q3 2022 for consumer, REITs, utilities, and electric-distribution sectors and 60 questions and feedback received in Q2 2022 for deals in electric-transmission, water, electric-generation, and gas-distribution sectors.

Source: NatWest, ESG-related investor questions and feedback for corporates in Q3 2022 and Q2 2022.

 

Most common terms

Notes: The most common terms are in blue. Based on 193 questions and feedback received in Q3 2022 for consumer, REITs, utilities, and electric distribution sectors.

Source: NatWest, ESG-related investor questions and feedback for corporates in Q3 2022.

II. Example questions and feedback

Issuer focused

Sustainability strategy

  • Consumer: How would your sustainability plans impact operating margins and what is the cost pressure to move to sustainable sourcing?
  • Is there a sustainability team which governs environmental and social issues? If so, how is the team integrated into the oversight of sustainability issues? If not, do you have plans to build one?
  • How do you differentiate yourself from competitors in the ESG space, and how will you monitor the same?

 

Instrument focused

Sustainability KPIs

  • REITs: Please provide a comprehensive figure of total avoided emissions i.e., a total vs project by project figure.
  • How much of your scope 3 targets relies on offsets?
  • What is the consequence of not reaching a target or the trigger event for step-up?

 

Sustainability projects

  • REITs: About 60% was allocated to acquisitions of logistics buildings with green building certifications. From an “additionality” perspective, it’s difficult to see any additional positive environment benefits generated from acquiring an already existing green building. Did you do any work to improve these green buildings after acquiring them?
  • Consumer: Given the global reach, can you provide details on geographies where the proceeds have been allocated?
  • Your framework committed to introduce a green finance committee who in due course, will be responsible for the management of proceeds, has the committee been set up yet?

 

Alignment with standards

  • REITs: What percentage of capital expenditure (CapEx) is aligned to the EU taxonomy?
  • Consumer: Are you using certification for some raw materials (e.g., palm oil)?
  • Can you confirm which project types will be using the EU taxonomy when categorising them as ‘green’ investments?

 

Bond characteristics

  • REITs: Do you expect to achieve better pricing with a sustainability-linked private placement versus a conventional private placement?
  • Investor response ... “We favour Use of Proceeds (UoP) more than sustainability-linked bonds (SLB), as impact is observed since projects are ringfenced and can see a transitioning of business model”
  • What is the reasoning behind the sustainability-linked format versus green or sustainable UoP?

 

Reporting

  • Electric-Distribution: Where can numbers for the EU taxonomy alignment be found?
  • Consumer: Will there be reporting on the impact for responsible procurement?
  • How often will you report on the KPI development during the lifetime of the bond? Will this be externally verified and, if yes, by whom?

 

III. Appendix

Alignment with standards       

This includes all questions associated with (but not limited to) alignment with:

  • The Sustainable Development Goals (SDGs)
  • The EU Taxonomy
  • The European Green Bond Standard (EUGBS)
  • The Science Based Targets initiative (SBTi)
  • The International Capital Market Association (ICMA) Bond Principles
  •  Regulations by industry-level bodies
  • Other regulatory

Bond characteristics

This includes all questions associated with (but not limited to) the structure (tenor, pricing, etc) and the choice of the bond.

ESG assessment           

This includes all questions associated with (but not limited to) environmental and other assessments conducted by the issuer.

Reporting        

This includes all questions associated with (but not limited to):

  • reporting of impact metrics
  • reporting of impacts, methodologies, and assumptions of indicators
  • reporting of progress on KPIs or historical performance
  •  frequency of reporting

Second Party Opinion (SPO)   

This includes all questions associated with (but not limited to):

  • rationale behind choosing the SPO provider
  •  feedback by the SPO provider

Stakeholder relations  

This includes all questions associated with (but not limited to):

  • supplier compliance with ESG
  • customer compliance with ESG

Sustainability KPIs      

This includes all questions associated with (but not limited to):

  • selection of KPIs
  • impacts, methodologies, and assumptions of indicators

Sustainability projects 

This includes all questions associated with (but not limited to):

  • projects eligible for use of proceeds
  • eligibility criteria
  • rationale behind projects evaluation and selection
  •  management of proceeds

Sustainability strategy

This includes all questions associated with (but not limited to) the issuer's broad ESG strategy (both current and future) or approach towards sustainability.

Sustainable finance framework           

This includes all questions associated with (but not limited to) the structure of the framework.

Verification     

This includes all questions associated with (but not limited to) assurance and auditing for the framework.

We’ll provide regular updates on frequently asked questions posed by investors, to keep you up-to-speed with their most current views. So, please do regularly check our Insights Hub for updates.

This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes.  It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

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